Managerial Accounting Assignment
For this assignment, please listen to the "Planet Money Podcast Episode 682: When CEO Pay Exploded" from February 5, 2016.
1. For the two time periods how were CEO salary and stock options treated for tax purposes and accounting purposes?
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1990
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2015
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What portion of CEO salary is tax deductible?
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What portion of CEO stock options is tax deductible?
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What portion of CEO salary is an expense?
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What portion of CEO stock options is an expense
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2. Why are stock options less appropriate for average workers (more appropriate for executives)?
3. If stock options are less appropriate for average workers why did start-up technology companies in Silicon Valley give stock options to most employees, not just CEOs? (Note: Stock options usually have a vesting period of several years; you can't cash out immediately or if you leave the company.)
4. Since individuals are risk averse, companies need to pay employees a risk premium. On average, which of the compensation plans below will employees prefer:
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Option 1
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Option 2
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Option 3
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Base Salary
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$100,000
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$50,000
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$0
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Bonus for High Performance
(50% likelihood)
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$0
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$100,000
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$200,000
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Average (Expected) Compensation
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$100,000
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$100,000
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$100,000
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5. Suppose that prior to 1993 CEO pay resembled Option 1. After the changes in 1993 did CEO pay resemble Option 2, Option 3 or something else?
6. Does the company pay cash when employees execute stock options? Are they free?
For the remaining questions, use the following information:
Ghostbusters Inc. recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the firm's long-term success. As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in business unit net income or 1% increase in the business unit's customer satisfaction index.
For example, increasing net income from $3 million to $3.3 million (or 10% from its initial value) leads to a bonus of 10% of salary, while increasing the business unit's customer satisfaction index from 70 to 73.5 (or 5% from its initial value) leads to a bonus of 5% of salary. A business unit executive that increased both her net income 10% and customer satisfaction 5% would get a bonus of 15% of salary. There is no bonus penalty when net income or customer satisfaction declines.
7. Complete the figure below to calculate the 2017 bonus % for the three business units.
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Restaurant Industry
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Wholesale Industry
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Payments Industry
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2016
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2017
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2016
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2017
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2016
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2017
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Values
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Net Income
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$350,000
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$390,000
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$375,000
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$395,000
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$320,000
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$317,400
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Customer Satisfaction
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69
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72
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73
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79
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71
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79.6
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% Change
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Net Income
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Customer Satisfaction
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Bonus %
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8. What factors might explain the differences between improvement rates for net income and those for customer satisfaction in the three units? Are increases in customer satisfaction likely to result in increased net income right away?
9. Deez Nuts Consulting's board of directors is concerned that the 2015 bonus awards may not actually reflect the executives' overall performance. In particular, the firm is concerned that executives can earn large bonuses by doing well on one performance dimension but underperforming on the other. What changes can it make to the bonus plan to prevent this from happening in the future?
10. The board of directors is also concerned that the competitive landscape is changing and current profitability and customer satisfaction levels might not continue to be equally important to the firm's long-term success. Which lever of control and what actions could they use to address this concern?
Attachment:- Assignment.rar